Some asset reconstruction companies have been found to be using innovative ways to structure transactions to circumvent regulations, according to Swaminathan J, Deputy Governor, Reserve Bank of India.
“During the course of our onsite examinations, we have come across instances where ARCs have been used or allowed themselves to be used, if I may say so, as a conduit to evergreen distressed assets. In many cases, there is a lack of transparency and consistency in the issuance and periodical valuation of security receipts (SRs). The practices surrounding the levy of management fees leave much to be desired,” Swaminathan said during a recent speech that was uploaded on the RBI website on Wednesday.
The Deputy Governor also observed that a few entities find new ways of achieving their designs once a particular practice has been called out as a violation or deviation. “Wherever it had come to our notice, we had directed the entities to arrange for remediation, including setting aside capital charge on gains thereon but only responsible conduct by the supervised entities themselves can bring the required efficiency to the system. In extreme cases, it may call for regulatory or supervisory actions, which of course we would like to use only as a last resort,” he cautioned
With regulations shifting towards a more principles-based approach, supervision is required to focus more on the substance of transactions than their legal form. This means that supervisors, instead of relying on the technical compliance presented by the management, may have to scrutinise the economic purpose and the underlying unstated intent behind the transactions, he added.
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